U.S. Expatriate Tax Services

The
U.S. has one of the most complex taxing systems in the world and Americanís
working or relocating outside the U.S. face an extremely complex tax situation. Knowledge
of these tax laws can save you thousands of hard earned tax dollars.

Residents of the U.S. working abroad for a limited duration often are entitled
to deduct travel and temporary living expenses while on overseas assignment.
Those who extend their stay in a foreign country or countries often are entitled
to exclude a significant portion of income earned abroad from their U.S. taxable
income, but only if they have met strict qualifying tests. Some may deduct
moving expenses to their new location and others may even deduct a portion of
the cost of securing housing while living overseas in addition to excluding a
portion of income earned abroad.

Most countries impose an income tax on income
derived from sources within that country similar to the way the U.S. imposes a
tax on income from U.S. sources and many countries have tax conventions with the
United States (i.e. Tax Treaties) to avoid double taxation of the same income.
Additionally the tax statutes of the U.S. and many other countries provide for
further tax relief in the form of a credit against tax imposed by the country of
residence for taxes paid to foreign taxing jurisdictions. The U.S. foreign tax
credit system is extremely complex and provides for different credits against
different types of income.

It is possible to claim the benefits of tax statutes
that allow the exclusion of certain foreign source income as well as certain
deductions (SEE BELOW); however a foreign tax credit may only be claimed against U.S.
taxable income that is subject to tax by a foreign jurisdiction and may not be
claimed against income that is excluded from tax in the U.S. Excess allowable
foreign tax credits may be carried to other tax years and applied against
foreign source taxable income.

Planning
is paramount for U.S. taxpayers working in foreign countries. Careful attention
to tax rules regarding the number of days needed to be spent outside the U.S. in
order to qualify for foreign earned income exclusion and taxpayers must
determine whether it is beneficial or not to claim certain tax benefits
depending on what they expect their future tax situation to be like. What
decisions are made on one year may affect several years in the future. For
example, should a U.S. taxpayer elect to forego the benefits of the earned
income exclusion under the Bona Fide Residence test in order to possible take
greater advantage of excess foreign tax credits, the election is binding for
five years.

Once you know you are going to be living and working
outside the U.S. begin planning with the assistance of an experienced
international tax specialist. Don't wait until it is time to file as by then it
might be too late to save money on your taxes.

Expatriate Foreign Earned Income (FEI) Exclusion-
The maximum Section 911 foreign source earned income exclusion
for Americans working abroad in 2009 is increased to $91,400. For 2010 the
limitation is increased to $91,500. The 2009 limitation is based on existing
legislation and could change based as part of the broad range of tax legislation
planned for 2010 to balance the huge deficit. As this is
considered by many uninformed politicians as a "tax loophole" Section 911 has
been always been target for tax reform, especially during difficult economic
times and high budget deficits

Self Employed Persons-The
FEI exclusion does NOT reduce the amount of foreign self employment income for
purposes of paying self employment (Social Security) taxes. So even if your net
foreign source earnings from self employment may be excluded from income
tax, the full amount will be subject to self employment tax without regard to
the FEI exclusion (subject to SE contribution limitations. Once again, plan
early and realize that you will be required to make quarterly tax payments for
at least the amount of self employment social security tax you will owe for the
year.

Employee or self employed sub-contractor-
Over the past decade (at least) many engineers, computer technicians
and other professionals have either been asked by their existing or new
employers to work overseas. Unlike most of the major U.S. corporations, often
the employer is not familiar with U.S. international tax laws and offer the
worker the opportunity to take the expatriate assignment as an independent
contractor instead of an employee, even though their job assignment meets the
definition of an employee for U.S. employment tax purposes. Sometimes they do
this to avoid paying social security tax for the worker or for other reasons,
and often the employer does not include any form of tax protection to the
worker. To the worker this means that they become responsible for filing tax
returns and paying taxes to the foreign government (which may be more or less
than the comparable U.S. tax amount) and often end up paying double tax to both
the U.S. and the foreign country, plus double the amount of social security tax
that they would have paid as an employee of a U.S. company . Additionally, they
end up paying much more tax than they would have paid by taking a U.S.
assignment due to foreign service bonuses and allowances being included in their
compensation package. So it is always wise to discuss a tax protection clause in
your foreign assignment package. For employers, treating an employee as an
independent contractor, even if they are working abroad, can increase payroll
tax exposure.

A word of cautionDON'T FILE LATE!!. During my years in public practice I have often
been contacted by Americans living and working overseas, many are private
contractors, who have not filed tax returns for several years. Reasons vary from
"I thought I did not have to file" to "I have been working so hard I have not
had time". The IRS has recently warned U.S. expatriate taxpayers that they will
be enforcing a long standing rule that in order to elect and claim the benefits
of the foreign earned income exclusion, the election must be made as a part of a
tax return that is timely filed (including a valid extension), or an
amended return that was timely filed or if the return is late, the tax return
must be filed within one year of the normal due date of the return.
Because it is possible to claim Section 911 FEI benefits for the first year of
foreign assignment using what is known as the Physical Presence Test, which is
often not met until after the time prescribed by filing the customary automatic
time to file extension, a special extension is permitted for the first year
abroad by filing a Form 2350 which permits an extension to file within 30 days
after the FEI exclusion requirements are met. HOWEVER, the FEI exclusion will be
denied for any return filed LATE if the return is filed after one year of the
normal due date of the return. I know this sounds complicated, but if you don't
file within the time permitted with a VALID extension, and the return is more
than a year late, you are denied the benefits of the Section 911 foreign earned
income exclusion. For example, assume you are a contractor working in a foreign
country (and paying no foreign income tax), earning $80,000 and don't get around
to filing a valid extension and your tax return is a year late. Even though you
may otherwise have qualified to exclude all of the foreign source income, the
entire $80,000 is now taxable. For those who have emailed me saying that you did
not file income tax returns for several years. this is your answer, SO DON'T
FILE LATE and employ the services of a competent tax specialist who is
experienced with international U.S. income tax matters.

Choosing
Powers & Company will ensure that your return is accurately prepared and that
you pay only the tax that you are legally obligated to pay. We have been
providing quality tax solutions at reasonable rates for over 30 years.